You have too many bank accounts

Fewer accounts lead to better household budgeting, study finds

If you really want to curb your spending, dump those extra checking and savings accounts and consolidate them all into one.

The traditional thinking is that having more than one liquid savings and checking account can help with saving, letting people segregate money and take advantage of different types of financial tools. But in fact, according to Promothesh Chatterjee, an assistant marketing professor at the University of Kansas, “if you have a single account, you spend less.”

According to a study Chatterjee undertook along with three professors from the University of Utah, the less complex our finances are, the more we save. Turns out, it’s tougher to justify our spending when it’s coming out of one account. Chatterjee’s research used four separate studies in which participants were given the opportunity to earn money and then spend it on different products. Two behavioral theories — “motivated reasoning” and “fuzzy-trace theory” — explain the results, he says.

The first, motivated reasoning, is behind a simple truth: People find spending a heck of a lot more fun than saving, and they’ll search for reasons to justify it.

Fuzzy-trace theory is a little more complicated. Originally conceived around children’s memory development, fuzzy trace says we have two parallel memory representations in our mind: verbatim traces, or remembering things exactly word-for-word, and gist traces, which is the general meaning of things.

For example, we don’t have to think out every move when we drive a car. Through gist traces, we automatically touch the directional arm when we want to make a turn and press the brakes just so for a slow-and-steady stop.

But presented with a question like, “What is 394 divided by 3?” most of us would have to think it through or turn to a calculator. (The answer is 131.33.) Generally, verbatim memories are more specific than gist memories and require more brain power.

The way those behaviors factor into saving and spending, Chatterjee’s research found, is that the “gist from multiple accounts tends to have fuzzier representations, since information comes from multiple sources.”

Past research has found that vague information is malleable and prompts people to make compromises in their decisions. “In the domain of goal-setting and self-presentation, research has found that people strategically distort vague information to perceive themselves at an advantage,” the study reports.

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Athletes, for example, are more likely to exaggerate their abilities on vague dimensions, such as mental toughness, than they would on a more precise measure, like running speed. We tend to think of ourselves as better than average on vague abilities like driving than we do on more precise ones, like parallel parking.

Although money can be considered fungible — what you have in one account is a substitute for money in another account — savings is enhanced with less versus more.

“It’s not that people cannot add and find out how much money they have in all the accounts together,” Chatterjee says. “People are looking for some kind of justification to spend money and the vagueness of multiple accounts provides them that justification.”

In other words, we’re looking for ways to fool ourselves.

Past research on consumption supports some of this theory. When self-regulation concerns pop up — I shouldn’t eat potato chips because they will make me fat — people actually are less likely to devour a single large bag of chips vs. multiple small ones. That’s because it’s clear how much has been taken from one large bag while a bunch of small ones requires more thinking, or the fuzzy math.

Here’s a catch: We spend less, no matter how many accounts we have, when we have to defend the spending to someone else. Who hasn’t hidden something new from a parent, a spouse or a significant other because they didn’t want them to admit they’d spent the money?

This theory, however, does not cover special savings accounts for, say, a child’s education or a new home. You should still keep those and feed them regularly. This applies to liquid accounts that you use most every day.

And, Chatterjee points out, not everyone will embrace this kind of thinking. “My cousin says this is all rubbish,” he says. “My only counter argument to that is you really don’t know how much you could save if you had a single account. This was a consistent finding across all four studies.”

Moreover, Chatterjee thinks this research can be key to the long-term financial security of all of us. “Our inability to save is a national, near-universal issue,” he says. “Given that, this type of research is important to lots of people.”

Considering our national savings rate average was a measly 3.9% last year and is trending at 2.4% so far this year, he may be right.

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